Last fall, Vonage sought financing to expand its broadband telephony
service. It tallied a relatively modest $35 million, but was struck by the
level of interest from the venture capital (VC) community.
After “pulling people away from the deal,” the upstart went out again just
three months later. This time, it socked away $40 million at more favorable
terms. And again, would-be investors were turned away, and Vonage hired Deutsche Bank
to handle the “onslaught of institutions” that still wanted a piece of the
The investment bank’s efforts resulted last month in a $105
million round, which will help Vonage expand to Latin America.
And while there’s no guarantee the company will beat AT&T
other telecom titans flooding the VoIP
because of lack of funds.
Not all startups can expect a swarm of VCs, but Vonage’s experience is an
example, albeit an extreme one, of an encouraging trend: After two-plus
years on the sidelines, VCs are raising and investing money again.
In the first half of 2004, 82 funds raised $5.8 billion, ahead of last
year’s pace, according to figures compiled by Thomson Venture Economics and
the National Venture Capital Association (NVCA).
“This is the busiest summer I can remember since I’ve been in venture,” said
Jeff Fagnan, who recently joined Atlas Venture as a partner after four
years with Seed Capital Partners.
More deals are coming through the door and more deals are getting done, he
said. What’s more, VCs say they have learned some painful lessons from the
late 1990s. They say they are more disciplined and more careful — no more
“drive-by due diligence.”
“There’s a tremendous flight to quality. Companies that have proven
themselves with customers and revenue are getting a lot of attention,”
Fagnan said, which helps explain Vonage’s rock star treatment.
Heading Toward the Exits
Improving exits — the IPOs or acquisitions of portfolio companies — are
spurring VC activity.
Google’s recent IPO inspired giddiness from the sprawling IT campuses of
Silicon Valley to the wood-paneled suites of Wall Street. Much of that is
specific to the search engine’s business, but the whispered hope was maybe,
just maybe, Google would re-ignite the IPO market.
The Google debut was successful, but it’s too soon to say if it was a
turning point. Still, it served as notice that, at least for the right
company, the IPO road is open again.
A more likely exit for VC portfolio companies is acquisition. Venture-backed
mergers and acquisitions activity during the second quarter of 2004 rose for the fifth
consecutive period, according to Thomson and NVCA.
In all, 86 firms were acquired, with an average valuation per deal hitting
$94 million, up from $88.6 million in the previous quarter.
The media and communications sector had eight deals tallying $1.14 billion,
driven by big buys like Ask Jeeves’
$501 million purchase of Interactive Search Holdings and Thomson’s $385
million pickup of TradeWeb.
The highest number of deals came in the software sector, though 25
transactions had comparatively lower values than other sectors. Some
notable acquisitions include Symantec’s $370 million
bid for Brightmail.
Telecom enjoyed a decent quarter with nine acquisitions, including Cienna’s
$466 million buy of Catena Networks.
“We had five exits last year,” said Kate Mitchell, managing director of BA
Venture Partners, the San Francisco venture arm of Bank of America that invests
in software, semiconductors and networking, bio-tech and
Acquisitions are more common among IT companies, Mitchell said. Much of the
IPO action so far this year has been in bio-tech and pharmaceutical, since
large companies in those spaces tend to license technologies rather than
snap up smaller firms.
Entrepreneurs are mindful of the trend, as well. Many, especially in the
networking and security spaces, have forged partnerships and technology
agreements with sector leaders in the hopes they will eventually get a
Though the VC resurgence is just gaining traction, there’s at least one
discernable trend: a shift toward early-stage investments.
In the second quarter, the top three funds raised were for early-stage
investments, and overall early-stage funds accounted for $1.62 billion or
53.5 percent of the amount raised in the three-month period, according to
Thomson and NVCA.
“[The move] is a very positive development for VCs and entrepreneurs,” said
Mark Heesen, NVCA’s president. “After years of nursing existing portfolios
that were selected to make it through the ‘bubble,’ those companies now are
being acquired or going public. This is leaving VCs with needed time to
transfer to funding new companies and new technologies.”
Although it’s not like 1999 where a business plan didn’t need business
fundamentals to get funded, startups still need a promising technology, a
defined market, excellent management and a dedicated team, Heesen said.
These days, VCs are bullish on the semiconductor, wireless,
security, specialized storage, top-of-stack networking and XML-based
But the shift to early-stage investments also means VCs have to work
harder. BA Venture Partners’ Mitchell said that section of the market will
“You have to stay smart and sharp,” she said. “We’re getting
to know more entrepreneurs in markets that are interesting to us.”
For example, BA Venture Partners recently backed a company from
Washington University in St. Louis. Missouri was not on most VCs’
lists of fertile tech grounds during the boom.
The company is also differentiating itself from other firms,
Mitchell said. VCs are trying to avoid the “lemming mentality” that caused
so many to jump into the same companies and sectors in years past. She
noted that some of the middle-stage deals were attracting a lot of investors
and driving up the price, another reason to focus on early-stage firms.
That’s not to say they won’t team with other firms, but there’s less
urgency to strike a deal for the sake of not wanting to miss out.
In addition to working more closely with research colleges and universities,
BA representatives are attending more conferences and workshops, and it is
stepping up its PR efforts.
Atlas Venture’s Fagnan is also looking in new places. For example, Atlas is
scouting investments in Canada, noting that there are deep pools of IT
talent there because of good schools and companies like Nortel
. The Canadian government has shaped policy to encourage startups,
He also said that VCs need to be knowledgeable about emerging markets like
China and India, if not for investments but as possible markets for their
“You cannot afford to be an opportunistic, serendipitous catcher’s mitt and
just take deals that flow through the door.”